Famous MTM election case brewing

Right on the heals of the recent trader-friendly Vines tax court decision - granting MTM to a trader who the court says deserved it - famous hockey star Jagr is suing his former accountant to build his case for MTM ordinary loss treatment. Millions of dollars in taxes are on the line.

Read the below article in the newspaper and my email to the author. I also offered help to Jagr's attorney. Let's see what happens in this interesting case. I will write more about it soon, this is a quick blog post tonight.

http://www.pittsburghlive.com/x/pittsburghtrib/sports/penguins/s_465310.html
By David Conti
TRIBUNE-REVIEW
Wednesday, August 9, 2006

Dear David:

Nice story but it’s got some incorrect facts.

A business trader needs to elect mark-to-market (MTM) accounting IRC 475 by April 15^th of the current tax year and then file a Form 3115 (Change of Accounting Method) by the due date of that year’s tax return including extensions – in order to deduct trading losses as ordinary rather than as capital losses.

Thousands of active traders have gotten stuck with capital loss limitations ($3,000 on an individual tax return); in fact it’s the biggest pitfall for active traders.

Only qualifying business traders – who qualify for trader tax status – may elect MTM and use it on their tax return.

The IRS rules for qualification for trader tax status are vague. In general, figure a trader needs to trade every day all day. Traders with other jobs can qualify, but the bar is raised to combat IRS prejudice.

Many CPAs and other tax preparation professionals did not know the rules a few years ago – more know them now – and it was common for tax preparers to miss the election deadline. It was also common for tax preparers to (sometimes incorrectly) assume their client did not qualify.

Jagr says he turned over all forms to his accountant. If Jagr or his accountant filed a proper MTM election on time, the IRS has a copy of it. So lost paperwork is not an valid excuse. Did Jagr also file a Form 3115; apparently not.

The IRS is rejecting Jagr’s new accountant’s appeal for trader tax status and MTM. Trader tax status can be claimed after the fact, but MTM must be elected on time and it was apparently not done. A recent tax court decision (Vines vs Commissioner) has probably emboldened Jagr’s attorney to try and obtain MTM for those old years. 

Jagr says he needs an "Election to be treated as an occupational trader" for his appeal. That is incorrect; he needs an "Election of IRC 475 MTM.”  You don’t elect trader status, you claim it, and its okay to claim it after-the-fact, while a tax return is still open – 3 years after filing.

This sounds like Jagr and his new professionals are using hindsight from a tax court decision (Vines) to gain MTM and a better tax posture.

It will depend on what Jagr instructed his prior accountant to do and I think it's too late after-the-fact to win this case; even considering the Vines victory. Before Vines, no way no how could Jagr win this case.

See my blog on the Vines tax court victory on May 12, 2006. Go to the archive section of the blog.

Feel free to call me with any questions.

Robert A. Green, CPA & CEO
Customer Service: 877-662-2014 (toll-free), or 646-216-8061
Author of The Tax Guide for Traders published by McGraw-Hill
Green & Company CPAs, LLC www.greentradertax.com www.greencompany.com

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